Starting a startup in some cases is like dating – you try to get to know someone until you see enough red flags to not want to pursue it any longer. We have all been in situations whereby our gut feeling is telling us something is wrong (red flag) but we try to convince ourselves that things will get better (hope).
Hope is a very good thing. It motivates us to push through during difficult times. It is essential for human evolution. However, when does hope surpass logic? What red flags need to be raised to say – ok enough. The honeymoon is over.
Actions speak louder than words
Many startups have limited resources and many of these resources aren’t dedicated to the startup’s vision. This lack of dedication is the first red flag. When someone wants to do business with you, they will do just that – do business WITH you. It’s often a trust test. You need to give part of yourself to prove that you’re the right fit and you’re capable of putting your words into actions. The same applies for the person willing to work with you.
This applies to:
- Service providers
Put simply, ANYONE WHO WANTS TO DO WORK FOR YOU. It doesn’t matter if it’s your best friend of 10 years, your family, your ex boss, etc. You’re starting a business? Then everyone needs to roll up their sleeves and get down to business. Which leads to my second red flag.
Do not distribute shares equally among partners. Reality is, there is always one doing more work than others. Also, sometimes it’s not only about the work that is being done. You need to evaluate how much risk is being absorbed by one of the shareholders. For example, if one of your shareholders works in the company and refinanced his home to inject capital in the company, chances are he will have a bigger stake. Take the time to breakdown and define the role and efforts of each person prior to signing any shareholder agreement. Put your ego aside and have honest conversations. You will make your life and everyone else’s more simple and avoid partnership disagreements that can lead to costly lawsuits.
Waiting for that amazing deal
A deal is only amazing when it has been closed and a check is being sent in the mail. If you have a potential client making promises to sign a deal but then time goes on, seasons change and nothing has been signed yet, move on. Keep following up with them but focus on the next lead or potential client. Be strategic, not hopeful. Also, if your clients are in the public sector, their budget and approval cycle is burdensome and long compared to a private client. You know what? I’m going to educate you on the difference in a next article (insert suspense music here).
Letting the bank run your show
I strongly recommend speaking with a financial advisor (or an excellent accountant) that you know and trust or even a friend or family member that know the ins and outs of the mindset of a financial institution prior to making your commercial financing request. You only get one chance when you’re in front of the commercial accounts representative. This is important because there are many advisors out there that will take advantage of you by, for example:
- Taking too much equity on your home to guarantee the loan
- Securing a too big of a portion of your sales
- Seeking numerous guarantees by combining your assets
Everything needs to be relative to how much you are giving and what covers their risk assessment. Advisors will always protect the financial institution first over your interest. To think otherwise is naïve. Numbers are presented in front of a Board of Directors. The Board seeks to ensure performance, a low default ratio and has a fiduciary duty towards its members/shareholders. Plan ahead any meeting and you will avoid long term costly mistakes.
Moral of the story: if you want a happy marriage, make sure the honeymoon lasts.